VISUAL CHINA GROUP(000681)：COVID-19 WEIGHS ON BUSINESS OPERATIONS IN NEAR TERM;DIGITAL WORKS OF ART TO RAMP UP

　　2021 and 1Q22 results missed our expectations
Visual China Group (VCG) announced 2021 and 1Q22 results. In 2021, revenue grew 15.2% YoY to Rmb657mn, attributable net profit rose 8.0% YoY to Rmb153mn, and recurring net profit climbed 3.6% YoY to Rmb125mn. In 1Q22, revenue increased 11.8% YoY to Rmb155mn, but attributable net profit fell 26.5% YoY to Rmb30.51mn. The results missed our expectations, as the COVID-19 pandemic had a notable impact on the company’s business lines.
　　Trends to watch
　　Revenue from overseas market declined due to COVID-19; gross margin contracted because of changes in revenue mix. By region, VCG’s revenue from China rose 21.1% YoY to Rmb623mn in 2021, whereas revenue from foreign markets slipped 39.4% YoY to Rmb338mn as COVID-19 weighed on the firm’s contract pricing. Governments and media institutions accounted for 37% of VCG’s revenue, corporate customers for 28%, marketing and service firms for 21%, and internet platforms 14%. VCG’s revenue from these four groups of customers increased 22%, 11%, 15%, and 8% YoY in 2021, respectively. VCG’s gross margin fell 7.7ppt YoY to 55.8% in 2021 due to a lower proportion of high-margin overseas business and a rising share of low-margin customization services. Selling expense ratio rose 2.4ppt YoY, as the company increased efforts to build a sales system and its sales staff rose 29% to 264 people amid diversifying revenue sources.
　　Pandemic resurgence in China in 2022 weighed on visual content and service business. The firm’s revenue growth slowed to 11.8% in 1Q22 due to a COVID-19 resurgence in China since March. Demand from advertising firms declined, while demand from small corporate customers also contracted due to the COVID-19 resurgence. As such, VCG’s sales softened in 1Q22. Meanwhile, orders from major customers for customized services grew notably, but travel restrictions and COVID-19 containment measures posed challenges to the fulfillment of these orders. In addition, as COVID-19 continues to spread, we believe it may affect the normal operations of customers who have signed long-term contracts with VCG. The COVID-19 situation remains uncertain. We believe VCG’s revenue growth may stay soft in the near term. We suggest watching COVID-19’s inflexion point and the firm’s profitability.
　　Digital art trading platform performs well; we are upbeat on its long-term growth potential. This platform known as Yuanshijue performed well after coming online on December 26, 2021. It entered into a partnership with more than 41 artists and intellectual property (IP) institutions. It has sold 126 original digital works of art, with average revenue per work of art rising. The works of art sold via this platform combined have exceeded Rmb10mn. We expect revenue from this platform to keep rising quarter by quarter. VCG previously acquired Corbis (a global well-known picture supplier) and 500px (a community for photographers). We believe VCG has gained a strong differentiated competitive edge in IP of pictures with high artistic value. The company has delayed introduction of its overseas platform due to COVID-19 and other issues. We suggest watching the timing of this introduction. We believe launching the overseas platform could help the company explore more diversified business models. In the near term, we think Yuanshijue could boost the digital collections market targeting individual consumers. It facilitates trading of digital collections by confirming ownership rights through blockchain. In the long term, we believe that the Yuanshijue platform will strengthen picture copyright protection and eliminate pain points in the digital copyright industry.
　　Financials and valuation
　　Given the substantial impact from the pandemic, we cut our 2022 earnings forecast 43.2% to Rmb144mn. We introduce our 2023 earnings forecast of Rmb184mn. The stock is trading at 53.3x 2022e and 41.7x 2023e P/E. As VCG launched a digital art trading platform at end-2021, we believe the company deserves a valuation premium amid current market preferences. Therefore, we shift our valuation methodology to a sum-of-the-parts (SOTP) approach, and cut our target price 6.9% to Rmb13.50, implying 22.8% upside. We maintain an OUTPERFORM rating.
　　Risks
　　Lingering impact of COVID-19; disappointing customer acquisitions; weaker-than-expected development of new businesses.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。